How to Start a Real Estate Holding Company or Real Estate LLC

Cody Cromwell
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How to Start a Real Estate Holding Company in 6 Steps

Set Up the LLC for Your Real Estate Holdings

Setting up a new real estate holding company, or real estate LLC, is no small task. To ensure your real estate LLC is set up and in order, you should work with a seasoned real estate attorney. Not only will your attorney help determine how to set up your real estate LLC, but he or she can also help you determine how to set up the LLC’s real estate holdings. This will ensure you’re in compliance with all applicable federal and state laws.

LLCs are very popular in the real estate industry. Although you can create a real estate LLC without an attorney’s help, doing so is much more difficult and the LLC is more likely to be considered invalid. It’s always best to start things off on the right foot. Your real estate attorney can set up your LLC, assist in filling out all the necessary paperwork, and help you file a DBA. They may even be able to assist you with incorporating your LLC if you aren’t able to do so by yourself.

First, choose the type of LLC with which you will form your real estate holding company. You can choose any LLC type, but an LLC with multiple members is a good idea because it provides your real estate holdings with added legitimacy. However, this may be a drawback if you want your real estate LLC to be managed by a single individual.

Open Separate Checking Accounts

For You Homebiz, and for Your Stockbroker.

The first step: Step 1. Open separate accounts at two different brokerage firms. This is in case your account with one of the firms is hacked and you get hacked in a day of it or don’t download or update the security patches.

This will ensure your business and personal finances are not screwed over in case you are hacked.

You should open a separate business checking account at a new brokerage firm. Then open a separate personal checking account with a different brokerage firm. This can also be done at online brokerage firms.

Step 2. Step up. Consider buying a higher valued share of stock for your personal securities. Step up when your personal and business accounts begin to show a return on your investment and watch your net worth go up.

Step 3. Remember to buy your shares based upon the discounted value, not the asking price. The discounted value often reflects a change in the market and is less speculative.

Choose a Professional to Work With

Regardless of whether it’s your first time working with a real estate holding company or real estate LLC, you’re going to want to make sure that your partner is someone that you trust to handle your business.

So when selecting a holding company or LLC, make sure that you choose someone that you’re comfortable with working with. This will make the experience more enjoyable. In a future post, we’ll go into more detail about the different types of holding companies and why you should choose an LLC over a sole proprietorship.

If you’re not really sure about anyone in particular, check out the Professional Referral Directory. The directory is a free resource of referral partners from the nation’s top business resource and professional referral company. Generally, the business owners listed here have gone through a rigorous screening process and have many years of experience in their particular field.

By choosing a referral partner, you’re assured that the person will be able to guide you through the process, and that your project will be a success.

The steps to register a real estate holding company or real estate LLC are relatively straightforward, but you’ll definitely need an experienced pro to walk you through each step.

Find a Property & Get It Under Contract

There are 3 ways to find the perfect property: • “We’re interested in selling or refinancing and would like to know how much we can afford for a home” … • “We’re ready to buy, but we’re not sure where” • “We’re open to a mortgage broker if we’re not the ones doing the buying”

Once you’ve identified a local property you’d like to put your offer on, you’ll need to decide whether to use a realtor or to go through a listing agent.

When you use a realtor, you’ll need to get the seller to agree to a purchase contingency.

However, if you’re concerned about losing the property… you can pay the listing agent’s commission and put an offer on the property without an contingency.

Secure Financing for Your Rental Property

It's no secret that investing in real estate can be intimidating. The thought of taking on real estate as an investment can be overwhelming.

To help you get a better grip on the subject, here are some tips to help you secure financing. We'll also look at some of the other benefits of going the LLC route.

The first thing you should do is determine if you want to build a rental portfolio or your own single investment property. In either case, you'll need to figure out how much money you'll need for your down payment, closing costs, and property taxes. You can use the Amortization Schedule–Schedule A Schedule AMT Form 1040 … to calculate this information.

Once you know your financing requirements, you can start looking for a lender. Whether you use an online service or go to your trusted lender, you've got some great options in finding money for your down payment.

A good way to get money for your down payment is to use a loan that offers a low or zero down payment. Many banks now offer loans that will only require you to put down 3% down.

If you don't want to go this route, you can look into other forms of loans. One popular option is a mortgage. Business loans and private loans are also options depending on your business and personal goals.

Close on the Property

A real estate holding company or LLC is quite an easy thing to set up as compared to a regular business entity and it can be used to buy and hold real estate. Typically investing in or holding a property does take a long period of time (often years) and involves many decisions, otherwise it would be a flea market.

Close on the Property

The first thing you need to do is to find a property which you are interested in having a RE company operate. Once you have found the property you want to start with, you should set up a RE company.

One of the reasons to back a property in a RE company is that in most cases the investor cannot deduct a loss in his/her personal tax return and from the tax laws, the loss on the first year on property held by a RE company can be offset by adjustments to other income or other expenses.

You can learn more about setting up a RE company in the current real estate laws in USA.

How a Real Estate Holding Company Works

A real estate holding company (REHCO) is a separate entity within a C Corporation. The REHCO will own the entire real estate which is an area of land, and can include other property. The REHCO is different than a holding company owned entirely by the corporate parent. The operation of a REHCO will not be considered when calculating K-1. As such, it may be necessary for the REHCO to be treated as an S or P company.

A REHCO is beneficial and cost effective tool for a company that owns property and wants to maintain a separate entity for tax purposes. A REHCO will allow a company to have flexibility with respect to its operations and capital structure. In addition, it will provide a corporate parent with information needed to determine whether the REHCO should be classified as an S or P company.

If you want to start a real estate holding company, your company will need to be structured in a C Corporation. The REHCO is a separate entity within the corporation that owns the real estate. It will be a disregarded entity for tax purposes. It may also be subject to state franchise tax.

The REHCO will own the entire real estate, and is separate from the DBA (doing business as) name of the corporation. The REHCO will have its own EIN and separate 1099s.

Relevant IRS Publication 333

Real Estate LLC Taxes

Real estate business corporations and real estate limited partnerships need to pay federal and state income tax. An LLC can elect to be taxed as a partnership or as a corporation. When an LLC elects the corporate tax treatment, the LLC must file a K-1 annual tax return.

All LLCs should consider whether a K-1 tax return is appropriate for their situation, given their needs and operating costs. When an LLC elects the corporate tax treatment, the LLC files a form 1065 and allocates its income or loss to the LLC's owners (partners). The LLC does not have to pay self-employment tax (Social Security and Medicare) because the LLC is a pass-through entity.

A real estate LLC can elect the partner tax treatment. In this situation, the LLC pays self-employment tax on a Schedule SE tax return form, sent by the tax form preparer. The LLC must make a good faith calculation and notify the partners that the LLC intends to allocate income to each partner.

Also, each partner (member) who expects to take a deduction must attach a copy of the member's completed Schedule E to the Schedule SE. This form will calculate and report the net income (or loss) from the LLC's business.

Who a Real Estate Holding Company Is Right For

A Real Estate Holding Company (REHC) is a business entity created by a husband and wife or it could be created by one individual.

A REHC operates in the same way as a regular LLC or S-Corporation. It allows the owners to share in the profits and losses of the company. Owners of a REHC can allocate profits to various members of the company, and the owner can be guaranteed money from the profits at the end of the year.

It is a great option for people who are planning on creating another sole proprietorship in the future but want an additional tax benefit.

Those who purchase a REHC are able to employ other individuals at a much lower payroll tax and income tax rate than a regular employer.

Those looking to run a service company (a handyman, electrician, etc.) can create a REHC (S-Corporation) instead of a regular Limited Liability Company as those pay a much lower tax rate.

Those who want a family owned business in a troubled economy can create a REHC. It allows business owners and family members to work together to create a business that will benefit the marriage, children and their love of the business. This is because the business does not just benefit one person, but allows everyone to share in the profits and goals of the business.

Costs of Setting Up a Real Estate Holding Company

When it comes to starting a real estate holding company, there are a few things to consider. First, you’ll need to do an in-depth analysis of what the holding company purchase means to you in terms of achieving your financial goals. In a holding company, all the business levels of the properties call for top level management. ․ These consist of setting up the rules, policies and money flow of the company. ․ It has to be created on top of your individual LLC. ․ Set up a written document that was created just for the holding company.

Pros and Cons of Starting a Real Estate Holding Company

Real Estate Holding Companies are a popular option for first time homeowners because they allow real estate investors to buy property with money they don’t necessarily have to fundraise.

We call them “pockets of capital” and what they offer is the ability to own property with someone else’s money. They are popular because they allow investors to keep cash in their own bank account while someone else purchases the property.

There are many reasons why investors choose this option … investors always want to buy property, but don’t necessarily have the money to do so on their own. One of the most important factors to consider is your down payment.

If you are financially able, then buying a property with your own money is the best option. If you don’t have the cash on hand, maybe a non-operating LLC or Partnership LLC is the best option for you. If you have equity in your current home (your home is paid for in full), this option will likely create tax liability for you. An operating real estate holding company only has one shareholder who is not responsible for taxes, that is you the shareholder.

Frequently Asked Questions (FAQs) About a Real Estate LLC

What Is the Purpose of a Real Estate Holding Company?

According to the Florida Bar, –a holding company allows its members to invest in real estate without having to form a separate limited liability company (LLC), which can be time consuming.

While it sounds like a lot of paperwork to form an LLC, a holding company offers all of the same benefits of an LLC, without the additional work.

If you’re just starting out and want to invest in real estate, a holding company may be the better option. Essentially, a holding company is a separate entity from the other members of the business it’s part of.

The main purpose of this separation is to shield investors from the liability that the members of an LLC would face if something goes wrong. Instead, investors in a holding company are solely responsible for purchases and problems they incur.

If a member of a business is sued for screwing up, they’re on the hook to pay for any fees the lawsuit will require. But in a holding company, the investors who aren’t responsible for a potential misstep can keep giving their money to the building or business and have no worries regarding liability. Also, if a member of the business dies, the lawsuit disappears, and the remaining members of the LLC are financially unaffected.

Can My Personal Debt Affect My Real Estate LLC?

It depends on the type of debt, the source, and what is being financed. The best way to determine this is to consult with an attorney.

Partnerships and corporations will likely be ok for liabilities, but the personal debts of a shareholder may also impact the business.

However, there are some debts that will be absorbed by the entity, which could limit your personal liability. Speak to a professional attorney and determine what you are looking at.

Do You Have to Be a Real Estate Agent to Manage Your Own Properties?

You may have been contemplating the idea of becoming your own real estate manager. Maybe you’ve just started working as a full-time agent, and you want to earn extra income. Or perhaps you’ve gotten a few properties under your belt and you’re ready to expand your business.

Whatever your scenario, your first question when you start thinking about incorporating may be – do you need to be licensed to be your own real estate manager?

The answer is, it depends.

If you’re a new agent who mainly manages your own rentals, there’s really no licensing requirement. But if you’re a broker managing other people’s properties, there’s no doubt that you’ll need to be licensed. Without broker’s license, you may also struggle to get additional business from clients.

Why choose a Real Estate Holding Company (Real Estate LLC)?

So, now you’re planning to start a real estate holding company or real estate LLC. What is that?

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